Legalized marijuana as a tax boon? Don't count on it

It's not every day you find a few spare billion dollars in your pocket. But if you did, what would you do with it? 

That's the potentially happy problem facing the federal government and the provinces if Prime Minister Justin Trudeau follows through on his plan to legalize marijuana, according to the best efforts of some economists to — pardon the pun — read the tea leaves. 

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The tax revenue derived from the sale of legalized pot would split about $5 billion per year between federal and provincial coffers, according to a recent report from CIBC World Markets, based on the apparent size of the current underground market and how legalization has played out for the state governments of Colorado and Washington.

The CIBC report assumes one or more "sin taxes" — similar to those currently applied to tobacco and alcohol sales — would be applied to marijuana, and that the country's current recreational market is, per capita, comparable to that of Washington, which legalized pot in 2012. 

The report also assumes that legalization will not lead to an increase in recreational marijuana use, based on observations in both U.S. states, nor will it cut into consumption of alcohol. 

Nobody knows the size of this market.— Mike Moffatt, Western University

Canada can also expect to make some extra money off "tourist buyers" — those who will travel from the U.S. and elsewhere to enjoy legalized pot. Not unlike the generations of young Americans who have been lured north by our lower legal drinking ages. 

"The desirability of increased marijuana tourism inflows will be questioned, no doubt," report author Avery Shenfeld writes, "but they would generate additional fiscal revenues for government on their other tourist spending."

But Shenfeld also notes the grand total of some $5 billion is only about 0.25 per cent of the GDP and thus "no barnburner." 

​Shenfeld also expressed doubt — contrary to speculation elsewhere — that the government will save money once it's no longer prosecuting marijuana users.

That's because Canada will likely still be bound by treaty obligations to police against marijuana exports. Police will also still need to keep the untaxed underground market in check and prevent sales to minors. 

Trudeau, meanwhile, has said any extra revenue will be directed toward public health and not to the government's general coffers. 

CIBC's numbers line up with a similar report issued by the Fraser Institute, which looked at B.C.'s marijuana market in 2004 and pegged the size of the provincial market at about $2 billion, based on police data and some educated guesswork about illegal grow operations. Though that figure ignored transportation, marketing and other costs that would arrive with legalization.

Monitoring the underground market

Both reports also note the need to keep the underground market in check after legalization so that tax revenue is not lost.

The conclusions of both reports are generally accepted by other economists, according to Mike Moffatt, of Western University's Ivey School of Business.

But Moffatt — who advised Trudeau on separate economic issues prior to last year's election — cautions there are still "a lot of unknowns" about the potential impact of legalized pot. 

"Nobody knows the size of this market and … we don't know exactly how this thing is going to be regulated," he says. 

Consumption numbers vary

Colorado certainly had a hard time predicting its market.

A 2014 report by that state's Department of Revenue, which predicted consumption of 121.4 tons of marijuana within the year, noted this figure was 31 per cent higher than the same department's previous prediction, 89 per cent higher than a study by the Colorado Futures Center and 111 per cent higher than an older estimate by the Colorado Center for Law and Policy. 

It's not clear how much marijuana was actually consumed in 2014, but a department spokeswoman says estimates about the resulting revenue are being "continuously revised."

Colorado's tax revenues for 2014 from legalized pot were a reported $76 million US. 

By 2015, the market had grown again, generating $135 million US, according to a joint report by New Frontier and ArcView Market Research. 

More for provinces?

Moffatt says one key difference in Canada could be what happens at the provincial level. He expects the provinces will have some leeway — as with alcohol sales — to regulate as they see fit. 

"It's how they structure it that's important," he says. 

"Is it going be like cigarettes, where they're sold at somebody else's store but the government puts control on packaging and sets the tax rate?" 

"Or is it a model more like [Ontario's liquor stores], where the government not only generates some tax from sales but also generates a stream of profits?" 

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Ontario, which makes about $1.8 billion per year from its near-monopoly on wine and liquor sales, appears to be angling for a similar approach to marijuana. Premier Kathleen Wynne remarked late last year it would make "a lot of sense" to sell marijuana through the province's 600 LCBO stores. 

Modelling marijuana sales on the less-strict alcohol policies of Alberta or Quebec, on the other hand, would reduce potential revenue. 

"Different provinces will do it differently. That won't affect federal revenue but it will certainly affect the provincial revenue," Moffatt says.